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Does globalization affect growth? Evidence from a new

index of globalization
a
Axel Dreher
a
Department of Management, Technology, and Economics , Swiss Federal Institute of
Technology , Zurich, CH-8092 Zurich, Switzerland E-mail:
Published online: 01 Sep 2006.

To cite this article: Axel Dreher (2006) Does globalization affect growth? Evidence from a new index of globalization, Applied
Economics, 38:10, 1091-1110, DOI: 10.1080/00036840500392078

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 Applied Economics, 2006, 38, 1091–1110

Does globalization affect growth?

Evidence from a new index of
globalization
Axel Dreher
Department of Management, Technology, and Economics, Swiss Federal
Institute of Technology, Zurich, CH-8092 Zurich, Switzerland
E-mail: mail@axel-dreher.de
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The study develops an index of globalization covering its three main

dimensions: economic integration, social integration, and political integra-
tion. Using panel data for 123 countries in 1970–2000 it is analysed
empirically whether the overall index of globalization as well as sub-indexes
constructed to measure the single dimensions affect economic growth.
As the results show, globalization indeed promotes growth. The dimensions
most robustly related with growth refer to actual economic flows and
restrictions in developed countries. Although less robustly, information
flows also promote growth whereas political integration has no effect.

I. Introduction and taxes. Vaubel (1999) found them to have lower

Many non-economists expect the costs associated with
globalization to exceed its benefits. Fears of an erosion
of social and environmental standards, high poverty
rates in less developed countries and ever higher
frequencies of financial crisis resulted in protests and
even riots. Quite the contrary, most economists
strongly believe the net effect of globalization to be
positive. Apart from economic theory, this optimism
is supported by a number of empirical studies as well.
To measure globalization, most of these studies
employed proxies like trade and capital flows or
openness to these flows. Using these proxies, Beer
and Boswell (2001) and Mah (2002) examined the
consequences of globalization on inequality. Li and
Reuveny (2003) analysed their effects on democracy.
As Heinemann (2000) shows, more globalized coun-
tries have lower increases in government outlays
government consumption.
The effects of globalization on growth have
also been frequently analysed with these measures.
Until recently, however, most studies examined them
employing cross-sections only. For example, Chanda
(2001) uses an index of capital account openness to
show that more developing countries have suffered
from globalization than not, while Rodrik (1998)
as well as Alesina et al. (1994) found no effect of
capital account openness on economic growth.1 With
respect to foreign direct investment (fdi) there
is evidence of a positive growth-effect in countries
which are sufficiently rich (Blomström et al., 1992) and
a negative one in low income countries (Garrett,
2001).2 Among others, Dollar (1992) analysed the
relationship between economic performance and
openness to trade, Frankel and Romer (1996) those
between growth and actual trade flows. Their results

1
Edison et al. (2002a) summarize the literature on capital account liberalization and economic performance.
2
Studies examining the effects of foreign direct investment on countries’ growth rates have been summarized by Durham
(2000).
Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online ß 2006 Taylor & Francis 1091
http://www.tandf.co.uk/journals
DOI: 10.1080/00036840500392078
 1092
show that both openness to trade and actual flows
are robustly related to growth. All of these studies
present, however, only cross-sectional estimates.
Moreover, they do not adequately control for endo-
geneity. Their results might therefore reflect unob-
served characteristics which do not vary over time
instead of being the consequences of globalization
or might reflect reverse causality.3
Aware of the shortcomings of the cross-section
approach, some recent studies use panel data to
examine the relationship between some dimensions
of globalization and growth. Among them, Dollar
and Kraay (2001) found that an increase in trade
flows and foreign direct investment resulted in higher
growth rates. Greenaway et al. (1999) also report
a strong relationship between trade and growth.
With respect to fdi, Borensztein et al. (1998) provide
evidence of a positive growth-effect – given a mini-
mum threshold stock of human capital. Carkovic and
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Levine (2002), to the contrary, do not find a robust
influence of foreign direct investment on growth.
A detailed analysis of the impact of several indicators
of financial integration and growth is provided
by Edison et al. (2002b). Their results show that no
robust relationship exists.
While those studies provide very detailed analysis of
individual sub-dimensions of globalization, none of
them examines the overall consequences of global-
ization on economic growth. The effects reported
for one dimension of globalization might therefore
appear only because other important aspects of
globalization are omitted from the regressions. Most
dimensions of globalization are strongly related to
each other, so including them separately in a regres-
sion induces collinearity problems. Excluding those
dimensions which are not the primary focus of the
analysis – the method preferred in the literature – can,
however, severely bias the coefficients estimated.
Moreover, it is not obvious that all dimensions of
globalization affect economic performance in the same
direction. Since the overall effects of globalization
are what matters, the lack of an overall measure and
an analysis of its relationship with growth is a
serious omission. The only study trying to measure
overall globalization is A. T. Kearney/Foreign Policy
Magazine (2002). They calculated a globalization
ranking using various subgroups. Their ranking is,
however, only available for recent years. Moreover,
important dimensions of globalization are omitted.
The measure can therefore not be used in an empirical
investigation.4
3
Dollar and Kraay (2001: 13) summarize criticisms of this approach.
4
The A.T. Kearny/ Foreign Policy measure has also been criticized for its ad hoc procedure of determining the weights
of its components and a lack of robustness to alternative weighting schemes (Lockwood, 2004).
A. Dreher
This study does not try to give specific policy
advice. It contributes to the literature in examining
the overall effects of several dimensions of globaliza-
tion on growth empirically in a time-series cross-
section context. Since many of these dimensions are
highly correlated, it is impossible to include them all
individually in one regression. Therefore, the study
develops an index of globalization covering its most
important aspects: economic integration, social inte-
gration and political integration. To measure these
dimensions, 23 variables have been combined to three
sub-indexes using an objective statistical method.
The sub-indexes are in turn aggregated into one
single index of globalization.
The remainder of the paper is structured as follows.
First, it presents the methodology and rationale of
the index, and the results. It proceeds by analysing
empirically the relationship between this index and
economic growth. The final section draws conclusions.
II. Methodology and Rationale
of the Index
Throughout the study globalization is meant to
describe the process of creating networks of connec-
tions among actors at multicontinental distances,
mediated through a variety of flows including
people, information and ideas, capital, and goods
(Clark, 2000: 86). It is a process that erodes national
boundaries, integrates national economies, cultures,
technologies and governance, and produces complex
relations of mutual interdependence (Norris, 2000:
155). Among others Keohane and Nye (2000: 4)
highlight the following dimensions of globalization:
. economic globalization, characterized as long
distance flows of goods, capital and services
as well as information and perceptions that
accompany market exchanges;
. political globalization, characterized by a
diffusion of government policies; and
. social globalization, expressed as the spread
of ideas, information, images and people.
To measure the degree of economic globalization,
two indexes are constructed. One index measures
actual flows: trade, foreign direct investment and
portfolio investment (all in percentage of GDP).
Income payments to foreign nationals and capital
employed (in percentage of GDP) are included
 Does globalization affect growth?
to proxy for the extent a country employs foreign
people and capital in its production processes. The
second index measures restrictions on trade and
capital using hidden import barriers, mean tariff
rates, taxes on international trade (as a share
of current revenue) and an index of capital controls.
Given a certain level of trade, a country with higher
revenues from trade taxes is less globalized. To proxy
restrictions of the capital account most previous
studies employed rather crude measures.5 Rodrik
(1998) used the proportion of years for which the
capital account was free of restrictions. Alesina et al.
(1994) coded a 0–1 dummy variable. Since openness
is not a yes-or-no question – it can and does
occur in differing degrees in different countries – an
index constructed by Gwartney and Lawson (2002) is
employed. It is based on the IMF’s Annual Report on
Exchange Arrangements and Exchange Restrictions
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1093
cultural globalization is interpreted as the domination
of American cultural products. This is because the
USA is the pacesetter in much of the global social-
cultural realm (Rosendorf, 2000: 111). Cultural
proximity could be proxied by the number of English
songs in national hit lists or movies shown in national
cinemas that originated in Hollywood. However, the
only proxy available is the number of McDonald’s
restaurants located in a country.
To construct the proxies for the empirical analysis,
each variable is transformed to an index with a zero
to ten scale, whereas higher values denote more
globalization. When higher values of the original
variable indicate higher globalization, the formula
((Vi
Vmin)/(Vmax
Vmin)  10) has been used for
transformation. Conversely, when higher values indi-
cate less globalization, the formula is ((Vmax
Vi)/
(Vmax
Vmin)  10). This is the procedure employed

and includes 13 different types of capital controls. by Gwartney and Lawson (2001) in the construction
The index is constructed by subtracting the number of their economic freedom index. The weights for the
of restriction from 13 and multiplying the result sub-indexes are calculated using principal components
by 10. analysis.7 The year 2000 is used as the base year.
The data on actual flows and on restrictions are For this year, the analysis partitions the variance of
aggregated into two sub-indexes and one overall the variables used. The weights are then determined
index as described below. All variables, their precise in a way that maximizes the variation of the resulting
definitions and data sources are listed in the principal component. Therefore, the index captures
appendix. the variation as fully as possible. As Gwartney and
To proxy the degree of political globalization, the Lawson (2001: 7) point out, this procedure is parti-
number of embassies in a country, the number cularly appropriate when several sub-components
of international organizations to which the country measure different aspects of a principal component.
is a member and the number of UN peace missions The same procedure was applied to the overall index.8
a country participated in are used.6 If possible, the weights determined for the base year
The aspects of globalization that are hardest to pin are then used to calculate the indexes for each single
down relate to the flow of information and ideas. year back to 1970. Where no data are available, the
According to Keohane and Nye (2000: 4), these weights are readjusted to correct for this. Since the
constitute, however, the most pervasive form of aim of the study is to examine longer run changes,
globalism. Therefore, they necessarily have to be the yearly indexes are averaged over five years.9
included in an index of globalization. These flows The weights for the sub-indexes are presented in
are measured distinguishing between three categories: Table 1. Table 2 shows the results for the 2000
data on personal contacts, data on information flows indexes as well as the overall index for 1975 and
and data on cultural proximity. To proxy flows of the change from 1975–2000.10 They are ranked by the
information and personal contacts measures like overall index in 2000. According to this index, the
international tourism, internet users, and number of world’s most globalized country is the USA with a
radios are used, among others. The variables are score of 6.48. This result is driven by high social
shown in Table 1. Following Saich (2000: 209), and political integration with the rest of the world.
5
An exception is Garrett (2001) who employs a ten scale indicator constructed by Brune (2000). He does, however, only report
cross-section results.
6
Those variables have been proposed by A. T. Kearney/Foreign Policy Magazine (2000) to proxy political engagement.
7
A similar methodology has been suggested by Lockwood (2004), testing for the robustness of the Kearny/ Foreign Policy
index of globalization.
8
While Gwartney and Lawson (2001) is followed in using the same weights for all periods, the robustness of the results
is tested with an index employing individual weights for each period.
9
This is consistent with the analysis of Barro (1997). In some cases, data are only available in five year intervals. In these
cases, data refer to the end of the five year period.
10
Due to space restraints, the other results are not reproduced in the table. They are available from the author.
 1094 A. Dreher
Table 1. Components of index of globalization

A. Data on economic integration [35%]

(i) Actual Flows (50%)
Trade (in percentage of GDP)* (23%)
Foreign direct investment (in percentage of GDP)* (29%)
Portfolio investment (in percentage of GDP)* (27%)
Income payments to foreign nationals (in percentage of GDP)* (22%)
(ii) Restrictions (50%)
Hidden import barriers (20%)
Mean tariff rate (30%)
Taxes on international trade (in percentage of current revenue) (24%)
Capital account restrictions (26%)
B. Data on political engagement [28%]
Embassies in country* (34%)
Membership in international organizations* (34%)
Participation in UN Security Council missions* (32%)
C. Data on social globalization [38%]
(i) Data on personal contact (24%)
Outgoing telephone traffic* (31%)
Transfers (in percentage of GDP)* (9%)
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International tourism* (1%)

Telephone average costs of call to USA (33%)
Foreign population (in percentage of total population) (26%)
(ii) Data on information flows (39%)
Telephone mainlines (per 1000 people) (18%)
Internet hosts (per capita)* (15%)
Internet users (as a share of population)* (18%)
Cable television (per 1000 people) (16%)
Daily newspapers (per 1000 people) (16%)
Radios (per 1000 people) (17%)
(iii) Data on cultural proximity (37%)
Number of McDonald’s restaurants (per capita) (100%)
Notes: The number in parentheses indicates the weight used to derive the indexes.
Weights may not sum to 100 because of rounding. All indexes range between 0
(not globalized) and 10 (globalized).
* These variables have been used in the A.T. Kearney/Foreign Policy Index as well.

To the contrary, the USA is ranked only 25th with
respect to economic integration. According to the
index, France has the highest political integration
with the rest of the world, followed by the USA,
Sweden and Canada. Other countries ranking high
on the overall index include countries like Sweden
and Luxembourg. While Hong Kong and Singapore
are ranked second and third, respectively, in terms
of actual economic flows (not reported in the table),
overall, they are ranked much lower. This is mainly
due to their low political integration with the rest
of the world. According to the political integration
index, Hong Kong is the country with the lowest
score. The table also shows, that overall the
world’s least globalized country is Rwanda, with an
index of 0.92. This country has been destroyed by
civil war and bad institutions. Its GDP per capita
growth rate has been highly volatile over recent years,
ranging between
4% in 1997 and þ3% in 2000. It is
politically isolated with only 16 in-country-embassies
in 2000 and membership in 32 international inter-
governmental organizations. Its sum of exports and
imports amounts to 32% of its GDP, foreign direct
investment inflows have been less than 1% of GDP
in the same year. Capital transactions are controlled
heavily (IMF, 1998).
The country least integrated in economic terms is
Togo, with fdi inflows amounting to 4% of GDP
in 1999 and a heavily restricted capital account.
Nepal has the lowest social globalization score. It had
21 in-country embassies in 2000 and was member in
30 inter-governmental organizations. Per 1000 capita,
12 daily newspapers have been published and, on
average, each citizen talked 1.1 minutes with people
in another country per phone in 2000. The results
also show that globalization increased since the
1970s, and particularly so for the more globalized
countries.
The next section analyses the influence of globali-
zation on economic growth.
 Does globalization affect growth? 1095
Table 2. Ratings of globalization

Economic Social Political

integration integration integration Summary rating

2000 2000 2000 1975 2000
1975–2000

1. United States 4.92 6.90 7.88 4.56 6.48 1.92
2. Canada 5.17 6.56 7.61 5.49 6.37 0.88
3. Sweden 5.62 5.63 7.85 5.18 6.24 1.06
4. Denmark 5.63 4.76 7.26 5.28 5.75 0.47
5. Finland 5.67 5.00 6.79 4.32 5.73 1.41
6. Luxembourg 8.84 5.37 2.21 5.45 5.71 0.26
7. United Kingdom 6.01 4.21 7.04 5.04 5.62 0.58
8. Switzerland 5.96 5.16 5.63 4.86 5.57 0.71
9. France 5.19 3.47 8.58 4.24 5.48 1.24
10. Belgium 6.18 3.44 7.33 6.30 5.47
0.83
11. Norway 5.31 4.68 6.62 4.37 5.43 1.06
12. Netherlands 6.46 4.21 5.52 5.31 5.36 0.05
13. Germany 5.38 3.94 6.99 4.26 5.28 1.02
14. Austria 5.39 4.00 6.75 4.44 5.25 0.81
15. Ireland 6.75 3.74 4.92 3.59 5.12 1.53
16. Australia 4.60 6.05 4.37 3.58 5.08 1.50
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17. Singapore 6.90 5.35 2.11 3.56 5.00 1.44

18. New Zealand 5.30 5.79 3.35 3.31 4.95 1.64
19. United Arab Emirates 8.15 3.36 2.54 3.41 4.81 1.40
20. Hong Kong 7.31 5.92 0.00 4.20 4.78 0.58
21. Japan 4.16 4.93 4.84 3.92 4.64 0.72
22. Italy 5.11 2.22 7.05 4.14 4.56 0.42
23. Portugal 5.61 2.51 4.88 2.23 4.25 2.02
24. Spain 5.01 2.22 5.31 2.85 4.05 1.20
25. Iceland 4.87 4.53 2.05 3.49 3.97 0.48
26. Argentina 4.17 1.98 5.96 2.35 3.84 1.49
27. Czech Republic 4.86 2.32 4.48 n.a. 3.80 n.a.
28. Poland 3.65 2.08 6.30 2.77 3.79 1.02
29. Israel 4.73 3.77 2.51 3.10 3.76 0.66
30. Russian Federation/USSR 3.29 1.41 7.50 1.07 3.74 2.67
31. Greece 4.76 2.36 4.30 3.01 3.73 0.72
32. Uruguay 4.43 2.66 3.99 3.55 3.65 0.10
33. Kuwait 4.31 3.60 2.72 2.72 3.61 0.89
34. Malta 4.68 4.19 1.34 2.93 3.57 0.64
35. Malaysia 4.69 2.02 4.16 2.50 3.54 1.04
36. Hungary 4.26 2.41 4.16 2.77 3.54 0.77
37. Egypt 3.41 1.32 6.67 1.59 3.52 1.93
38. Bahrain 5.50 2.79 1.77 2.62 3.46 0.84
39. Estonia 5.81 2.68 1.44 n.a. 3.43 n.a.
40. Korea, Republic 3.86 2.72 3.65 2.71 3.37 0.66
41. Chile 4.45 1.84 3.66 2.44 3.25 0.81
42. Turkey 4.04 1.65 4.22 1.85 3.19 1.34
43. Venezuela 4.10 1.73 3.99 2.86 3.18 0.32
44. Brazil 3.50 1.54 4.95 1.51 3.17 1.66
45. Cyprus 3.32 3.79 2.04 2.03 3.15 1.12
46. Jordan 3.93 1.00 5.07 1.59 3.15 1.56
47. Panama 4.90 2.09 2.31 3.81 3.13
0.68
48. Slovak Republic 4.48 2.04 2.80 n.a. 3.10 n.a.
49. Costa Rica 4.74 2.06 2.39 2.34 3.09 0.75
50. Indonesia 3.85 0.96 4.98 1.69 3.08 1.39
51. Slovenia 4.31 2.84 1.79 n.a. 3.07 n.a.
52. China 3.23 1.17 5.36 0.90 3.04 2.14
53. Romania 3.73 1.62 4.08 3.34 3.04
0.30
54. South Africa 4.21 1.56 3.55 1.96 3.03 1.07
55. Latvia 4.94 2.25 1.54 n.a. 2.99 n.a.
56. Mexico 4.03 1.47 3.44 2.19 2.91 0.72
57. Trinidad and Tobago 4.57 1.94 1.92 1.92 2.86 0.94
(continued)
 1096 A. Dreher
Table 2. Continued

Economic Social Political

integration integration integration Summary rating

2000 2000 2000 1975 2000
1975–2000

58. Bulgaria 4.04 1.25 3.43 2.72 2.83 0.11
59. Kenya 3.33 0.81 4.81 1.70 2.80 1.10
60. Jamaica 4.21 2.11 1.88 2.10 2.78 0.68
61. Zambia 4.62 1.19 2.63 2.15 2.78 0.63
62. India 2.26 1.01 5.86 1.85 2.78 0.93
63. Lithuania 4.66 1.79 1.74 n.a. 2.78 n.a.
64. Bolivia 4.32 1.10 2.88 2.04 2.72 0.68
65. Peru 4.22 1.11 2.87 2.00 2.68 0.68
66. Nicaragua 4.66 1.18 2.17 2.21 2.67 0.46
67. Thailand 3.40 1.21 3.61 1.62 2.64 1.02
68. El Salvador 4.39 1.57 1.84 1.84 2.63 0.79
69. Tunisia 2.48 1.09 4.91 1.97 2.63 0.66
70. Colombia 3.61 1.39 3.03 1.71 2.62 0.91
71. Senegal 3.00 1.02 4.23 1.57 2.60 1.03
72. Bangladesh 2.56 1.03 4.76 1.08 2.59 1.51
73. Ghana 2.78 1.40 3.94 1.57 2.58 1.01
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74. Fiji 3.93 1.73 1.95 1.89 2.56 0.67

75. Ukraine 3.77 0.74 3.46 n.a. 2.55 n.a.
76. Nigeria 2.72 0.16 5.51 1.84 2.53 0.69
77. Algeria 2.81 1.21 3.93 1.81 2.52 0.71
78. Guatemala 3.89 1.45 2.06 1.85 2.47 0.62
79. Philippines 3.60 1.16 2.82 1.41 2.47 1.06
80. Ecuador 3.65 1.19 2.60 1.81 2.44 0.63
81. Pakistan 1.58 1.12 5.30 1.54 2.43 0.89
82. Morocco 2.48 1.14 4.09 1.92 2.42 0.50
83. Mauritius 3.89 1.70 1.46 1.77 2.40 0.63
84. Oman 4.29 0.78 2.15 2.58 2.38
0.20
85. Uganda 4.14 0.89 1.91 1.24 2.31 1.07
86. Honduras 3.85 1.20 1.84 1.65 2.30 0.65
87. Croatia 2.89 1.99 1.86 n.a. 2.27 n.a.
88. Botswana 4.36 1.13 1.10 2.68 2.25
0.43
89. Zimbabwe 3.14 1.14 2.52 0.70 2.22 1.52
90. Dominican Republic 3.04 1.51 1.95 1.58 2.17 0.59
91. Sri Lanka 3.10 1.10 2.16 1.08 2.09 1.01
92. Iran 2.42 1.01 3.11 2.44 2.08
0.36
93. Cameroon 2.50 0.99 3.00 1.47 2.07 0.60
94. Cote d’Ivoire 2.37 0.95 3.08 1.06 2.03 0.97
95. Namibia 2.99 1.22 1.77 0.21 1.99 1.78
96. Tanzania 2.09 0.97 3.18 1.99 1.97
0.02
97. Syrian Arab Republic 3.01 0.26 2.96 1.82 1.96 0.14
98. Albania 3.00 1.17 1.71 0.85 1.96 1.11
99. Paraguay 3.45 0.63 1.83 1.76 1.94 0.18
100. Guyana 3.53 0.72 1.51 1.87 1.92 0.05
101. Bahamas 1.13 3.31 0.83 0.95 1.87 0.92
102. Saudi Arabia 0.86 1.72 3.27 2.08 1.84
0.24
103. Barbados 2.24 1.84 1.17 2.39 1.80
0.59
104. Gabon 2.62 0.31 2.70 1.80 1.77
0.03
105. Congo, Republic 3.27 0.09 1.98 1.12 1.72 0.60
106. Mali 2.00 0.51 2.96 1.26 1.70 0.44
107. Congo, Dem. Republic 2.24 0.21 3.04 1.13 1.70 0.57
108. Nepal 2.61 0.03 2.78 0.98 1.69 0.71
109. Malawi 2.61 0.88 1.48 1.76 1.65
0.11
110. Chad 2.28 0.69 1.78 1.04 1.55 0.51
111. Belize 1.53 1.80 1.18 0.81 1.54 0.73
112. Niger 1.86 0.70 2.13 1.18 1.50 0.32
113. Papua New Guinea 2.78 0.20 1.18 1.29 1.37 0.08
114. Togo 0.98 0.87 2.49 1.47 1.35
0.12
(continued)
 Does globalization affect growth? 1097
Table 2. Continued

Economic Social Political

integration integration integration Summary rating

2000 2000 2000 1975 2000
1975–2000

115. Central African Republic 2.02 0.37 1.75 1.38 1.33
0.05
116. Madagascar 1.56 0.76 1.64 1.21 1.28 0.07
117. Burundi 2.00 0.58 1.25 0.93 1.26 0.33
118. Benin 0.59 0.81 2.54 0.61 1.21 0.60
119. Sierra Leone 2.10 0.13 1.54 1.41 1.21
0.20
120. Myanmar 2.22 0.03 1.03 0.90 1.07 0.17
121. Guinea-Bissau 0.99 0.26 2.00 0.73 0.99 0.26
122. Haiti 0.34 1.07 1.53 0.72 0.94 0.22
123. Rwanda 1.33 0.33 1.20 0.81 0.92 0.11
Notes: All indexes range from 0 (not globalized) to 10 (globalized). The countries are ranked according to their overall index
score in 2000.

Table 3. Per capita GDP growth and globalization (1970–2000, 123 countries)
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1970–1975 1976–1980 1981–1985 1986–1990 1991–1995 1996–2000

Countries with low globalization 2.62 2.08 0.35 0.68 0.14 1.16
Number of countries 68 71 80 83 64 40
Countries with high globalization 2.99 3.02 0.79 2.64 1.24 2.04
Number of countries 38 38 36 36 59 82
H0: mean(low)
mean(high) ¼ 0 (P > |t|) 0.58 0.17 0.51 0.001 0.11 0.05
Notes: Indicates GDP per capita growth rates in percentage in countries with an overall globalization index smaller and
greater than the index-mean of 2.45, respectively.

III. Empirical Estimates
Table 3 gives first evidence on the relationship
between growth and globalization. The countries
are separated into two sub-samples according to their
overall index score. The mean of 2.45 of the index
is used to draw the line between more and less
globalized countries. As can be seen, more globalized
countries grew faster in each five-year-period. A
t-test shows that the hypothesis of equal means
can be rejected between 1986–1990 and 1996–2000.
To analyse this relationship in greater detail, pooled
time-series cross-section regressions are conducted.
The dependent variable is the growth rate of per
capita GDP. The data are averages over five years
and cover the time period 1970–2000. They extend
to 123 countries. Since some of the data are not
available for all countries or years, the panel data are
unbalanced and the number of observations depends
on the choice of explanatory variables. To account
for time-invariant unobservable heterogeneity
potentially correlated with the regressors, a fixed
effects specification is used. A dummy for each of
the five-year-periods is also included. All standard
errors are estimated robustly. All variables, their
precise definitions and data sources are listed in the
appendix.
The first column of Table 4 includes variables
typically employed in growth regressions (e.g. Barro,
1997). The initial level of GDP per capita at each
of the five-year periods is included to measure the
conditional rate of convergence to the steady state
growth rate. Secondary school enrolment and the
log of life expectancy are employed as indicators of
human capital. Since higher population growth
should directly lead to lower per capita economic
growth, the log of the fertility rate is also included.
Higher domestic investment as a share of GDP
should lead to higher growth rates whereas the effect
of higher government consumption is not obvious
a priori. On the one hand, a large government sector
may induce inefficiencies and crowd out the private
sector. On the other, the provision of an efficient
infrastructure and a proper legal framework may
promote growth (Hansson, 2000). To account for the
quality of the legal system and the enforceability
of property rights, a rule of law index constructed
by Gwartney and Lawson (2002) is included in the
regression. Obviously, better institutions should
promote growth. Finally, the change in a country’s
 1098 A. Dreher
Table 4. Per capita GDP growth and globalization (1970–2000)

1 2 3 4 5 6
Overall index of globalization 1.09 0.84 0.95 0.07
(3.49 ) (2.29*) (2.96 ) (2.29*)
Index of economic integration 0.04
(2.53*)
Index of social integration 0.02
(1.06)
Index of political integration 0.01
(0.64)
Log (per capita GDP),
5.74
5.93
7.34
5.88 1.30 1.22
beginning of period (
6.86 ) (
7.30 ) (
5.39 ) (
7.33 ) (3.70 ) (3.30 )
Secondary school enrolment 0.03 0.03 0.004 0.03
0.003
0.002
(3.11 ) (2.53*) (0.40) (2.33*) (
1.32) (
0.99)
Log (life expectancy) 1.86 0.60 3.27
0.04
0.37
0.33
(0.84) (0.26) (0.88) (
0.02) (
1.54) (
1.44)
Log (fertility rate)
1.38
1.49
1.04
1.25
0.28
0.28
(
1.38) (
1.48) (
0.86) (
1.20) (
2.36*) (
2.55*)
Investment (in percentage of GDP) 0.18 0.17 0.18 0.17 0.01 0.01
(5.92 ) (5.82 ) (3.54 ) (5.71 ) (2.85 ) (2.73 )
Government consumption (in percentage of GDP)
0.093
0.10
0.12
0.12
0.01
0.01
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(
1.98*) (
2.20*) (
2.03*) (
2.64 ) (
1.11) (
1.06)

Rule-of-law index 0.19 0.17 0.06 0.13 0.02 0.02
(2.01*) (1.83**) (0.52) (1.32) (2.24*) (2.10*)
Inflation rate
0.001
0.001
0.002
0.001
0.0001
0.0001
(
3.84 ) (
3.98 ) (
3.70 ) (
3.86 ) (
2.46*) (
2.68 )
Growth rate of terms of trade 4.41 3.55 4.71 3.45 0.18 0.18
(1.93**) (1.58) (1.32) (1.55) (1.17) (1.23)
Liquid liabilities
0.22
(
0.23)
Stock market capitalization 0.30
(0.67)
Political rights
0.12
(
0.45)
Civil liberties 0.17
(0.57)
Democracy
0.04
(
0.45)
Estimation method OLS OLS OLS OLS GMM GMM
Number of countries 106 106 76 105 102 102
Number of observations 435 434 260 426 325 325
R2 (within) 0.42 0.44 0.45 0.43
Hausman test (Prob > Chi2) 0.00 0.00 0.00 0.00
(Prob>F ) 0.00 0.00 0.00 0.01 0.00 0.02
Sargan test ( p-level) 0.45 0.26
Arellano-bond test ( p-level) 0.82 0.73
Notes: In the OLS regressions, the dependent variable is the average GDP per capita growth rate. When estimated with
GMM, the natural logarithm of per capita GDP at the end of each five-year period is employed.
A dummy for each time period is included; the OLS regressions also include a dummy for each country.
The Hausman test tests whether the difference between random and fixed effects estimates is not systematic; the F-test tests
whether it is valid to exclude the time dummies.
Robust (White) t-statistics are shown in parentheses:

significant at the 1% level, * significant at the 5% level, ** significant at the 10% level.

terms of trade and its rate of inflation are included.
Both have been shown to have a significant effect
on growth in previous studies.
Most results do qualitatively correspond to those
of Barro (1997). Higher initial GDP is significantly
associated with lower growth rates. Higher govern-
ment consumption over GDP also leads to
lower growth. The same is true for low investment
and high inflation. Growth rates are higher with
better institutions and higher school enrolment.
Whereas the coefficients of those variables are
significant at the 5% level at least, the coefficient
of a change in a country’s terms of trade is
only marginally significant, with a positive sign.
 Does globalization affect growth?
Life expectancy and fertility rates do not significantly
influence economic growth.
Column 2 includes the overall index of globaliza-
tion. As can be seen, its coefficient is positive and
significant at the 1% level. The coefficient of the
index shows that a one point increase would expand
GDP per capita growth by 1.09 percentage points.
For example, if Latvia was as integrated with the
world as Spain, all else equal it could raise its
growth rate from currently 5.94 to 7.1%. This could
be achieved, for example, by increasing inflows
of foreign direct investment from 7 to 27% of
GDP, exports plus imports (in percentage of GDP)
from 107 to 140% and portfolio investment (in
percentage of GDP) from 5 to 30%. The same
difference is between Italy and the United Kingdom
while increasing the globalization index of Zimbabwe
to those of the USA would increase the Zimbabwean
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1099
(e.g. Fernandez et al., 2001, Sala-i-Martin 1997).
Column 4 tests for these impacts. It includes the
political rights and civil liberties index constructed
by Gastil (2002) and the Polity-IV-indicator of
democracy. However, none of these variables has
a significant influence on economic growth.12 Again,
the globalization index keeps its significance.
With some of the variables there is an obvious
endogeneity problem: previous research has shown
that, e.g., fertility is influenced by measures of wealth
(Barro and Lee, 1994). If fertility declines with
growth, it is endogenous. The same is true for gov-
ernment consumption and investment. Endogeneity
might even be a problem for the index of globalization.
In the framework of the Arellano-Bond estimation
discussed below, the right-hand side variables can
be instrumented and the validity of the exogeneity
assumption can be tested.13 The Arellano-Bond

growth rate by 4.64 percentage points. The rule of law estimator consists in first-differencing the estimating
index is only significant at the 10% level while equation and using lags of the dependent variable
changes in the terms of trade are now completely from at least two periods earlier as well as lags of the
insignificant. The regression includes 106 countries right-hand side variables as instruments. Since there
with an average of 4.1 observations. It explains 44% are more instruments than right-hand side variables,
of the within-groups variation. the equations are over-identified and instruments
King and Levine (1993) argue that the quality of must be weighted in an appropriate way.
a country’s financial markets can influence economic Following Dollar and Kray (2001), the natural
growth. In column 3, variables to account for this logarithm of per capita GDP at the end of a five-year
quality are included. Liquid liabilities are a typical period on its lag and other variables is now regressed,
measure of the financial depth and thus of the overall as opposed to regressing the growth rate on these
size of the financial sector, stock market capitaliza- variables. However, the formulation of the model
tion (relative to GDP) is an indicator of the size in differences means that the regression shows how
of the stock market. However, confirming the results changes in globalization affect growth.
of Chanda (2001), these variables are completely Column 5 presents results from the Arellano-Bond
insignificant. Due to missing data, the number of one-step GMM estimator, which uses the identity
observations is reduced dramatically. This results in matrix as a weighting matrix.14 Applying this
generally lower t-statistics. School enrolment and the estimator leads to a dramatic loss of observations,
rule of law no longer influence growth significantly. since information from two periods is discarded by
The globalization index, however, is significant at the differencing and instrumenting. In some cases, this
5% level. results in lower t-statistics. With one exception, the
In recent years, the impact of political and results are nevertheless similar to those obtained with
institutional variables on economic growth has been OLS: GDP per capita at the beginning of the period
highlighted.11 Sala-i-Martin (1997), e.g., reports a is now significantly positive. This confirms the results
positive influence of civil liberties and political rights of Dollar and Kraay (2001).15 The index of globaliza-
on growth. Another variable frequently included tion is significant at the 5% level, again with a
in growth regressions is an index of democracy positive sign. Compared with the previous results,
11
Carmignani (2001) provides an overview.
12
In comparing these results to those of cross-section studies, note that the fixed country effects employed here do not give
much room for institutional variables to affect growth.
13
Moreover, the GMM estimator of Arellano and Bond (1991) is consistent, whereas the within groups estimator is
inconsistent in the presence of a lagged dependent variable in a short panel (Nickell, 1981).
14
The two-step GMM estimator weighs the instruments asymptotically efficiently using the one-step estimates. However, in
small samples like this, standard errors tend to be under-estimated by the two-step estimator (Arellano and Bond, 1991: 291).
15
Note that initial GDP is not significant when per capita GDP growth is employed as dependent variable instead, while most
of the other results remain. Particularly, the choice of dependent variable has no impact on the influence of the index of
globalization.
 1100
the magnitude of the coefficient is similar. The
estimate shows that a one point increase in the
index of globalization increases GDP growth by
7 percentage points. The average yearly growth rate
thus equals about 1.4 percentage points, slightly
higher than the previous result of 1.09.
On the basis of the Arellano-Bond estimator,
a Sargan test on the validity of the instruments can
be conducted. This amounts to a test for the exo-
geneity of the covariates. As can be seen from column
3, the Sargan test accepts the over-identifying
restrictions. Hence, strict exogeneity is not rejected.
The Arellano-Bond test of second order autocorrela-
tion, which must not be present in the data in order
for the estimator to be consistent, also accepts the
specification.
While the overall effect of globalization on growth
was found to be positive, it is interesting to examine
the effects of the single components. It is not obvious
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that economic, cultural and political dimensions
of globalization will necessarily go along with or
reinforce each other (Brown et al., 2000: 280). As
column 6 shows, only economic integration seems
to be correlated with growth rates. Neither social nor
political integration seem to have any influence
on economic growth. One potential problem with
this specification results from correlation between the
three sub-indexes.16 This probably results in lower
t-statistics. Therefore, the three dimensions of globa-
lization are analysed individually as well. In an
effort to provide more detailed information, I replicate
the analysis with the sub-indexes instead of the overall
index of globalization. Table 5 starts with economic
integration. There are various reasons why economic
integration should promote growth. Trade makes it
possible to exploit comparative advantages. Countries
gain from specialization. Foreign investment might
serve to close ‘idea gaps’ between developing and
developed countries (Romer, 1993). It often comes
along with management educated in industrial coun-
tries. This management may try to press for reforms,
in order to improve the business environment and
enhance profits (Boockmann and Dreher, 2003).
Since there might be spillover effects, foreign invest-
ment could increase the productivity of the whole
economy (Rappaport, 2000). Workers from other
countries probably produce similar effects. Openness
to international trade should promote growth since
16
The correlation between economic integration and social globalization is 0.51, those between economic integration and
political engagement 0.11 and those between social globalization and political engagement 0.47. However, if fixed effects are
taken into account correlations are substantially lower (0.22, 0.05 and 0.1, respectively).
17
It has been shown by Dreher and Siemers (2003) that capital account restrictions and corruption re-enforce each other.
18
To analyse this relationship in more detail, the index was also interacted with the measures of financial markets’ quality
introduced above and with the rule of law index. All resulting coefficients are, however, completely insignificant. This is
consistent with Rodrik (1998).
A. Dreher
it encourages gains from trade and fosters innovation
and efficient production. The effects of capital con-
trols on growth are less obvious a priori. With open
capital accounts, countries in need of capital can
borrow abroad to finance investment, which promotes
growth (Obstfeld, 1998: 2). Moreover, government
interventions probably result in inefficiencies and
underinvestment. They could also promote corrup-
tion.17 On the other hand, however, such controls can
ensure that domestic savings are channelled towards
domestic investment (Chanda, 2001: 5). In some cases,
capital controls increase the flexibility of monetary
and fiscal policy. This could increase domestic
growth rates.
Column 1 shows the results for the economic
integration subindex (estimated by OLS). As can
be seen, higher economic integration is significantly
associated with higher growth. However, while actual
flows promote growth rates (column 2), restrictions
on trade and capital do not have any influence
(column 3).
The insignificant coefficient of restrictions could
reflect an average of the benefits from liberaliza-
tion in countries with highly developed financial
markets and institutions and the costs associated
with a higher frequency of financial crisis in less
developed countries. According to the World Bank
(2002a: 10), integration with global capital markets
can lead to disastrous results without sound domestic
financial systems. Garrett (2001) suggests that capital
account openness promotes growth only in more
developed countries. I therefore employ interactions
of the restrictions-subindex with dummies for low,
middle and high levels of GDP and the log of these
countries’ per capita GDP at the beginning of a
five-year period. The results are reported in column 4.
It turns out that freedom from restrictions signifi-
cantly promotes growth only in high income coun-
tries. In low and middle income countries, the
coefficients of the interactions are insignificant.18
The insignificant coefficient does, however, not
necessarily mean that liberalization does have no
influence on growth in these countries. Even in the
absence of a direct effect, lower tariffs probably
lead to more trade, and liberalization of the capital
account promotes foreign investment. Therefore, the
absence of restrictions could increase growth rates
indirectly.
 Does globalization affect growth? 1101
Table 5. Per capita GDP growth and economic integration (1970–2000)

1 2 3 4 5 6 7a 7b
Index of economic integration 0.42 0.04
(2.40*) (2.37*)
Index of actual economic flows 0.96 0.07
(3.92 ) (2.53*)
Index of restrictions 0.004
(0.03)
Restrictions  Log (per capita GDP),
0.03
0.001 0.001
(low income countries) (
1.20) (
0.35) (0.21)
Restrictions  Log (per capita GDP), 0.01 0.001 0.001
(middle income countries) (0.41) (0.62) (0.64)
Restrictions  Log (per capita GDP), 0.09 0.004 0.01
(high income countries) (3.91 ) (1.72**) (3.56 )
Log (per capita GDP),
5.75
5.62
5.81
6.32 1.34 1.38 0.86 0.69
beginning of period (
6.94 ) (
6.81 ) (
6.73 ) (
7.27 ) (3.85 ) (4.15 ) (3.20 ) (6.29 )
Secondary school enrolment 0.03 0.03 0.03 0.02
0.003
0.003
0.001 0.0004
(3.36 ) (3.03 ) (2.82 ) (2.27*) (
1.11) (
1.26) (
0.44) (0.42)
Log (life expectancy) 0.94 0.77 1.97 2.09
0.34
0.38
0.16
0.11
(0.43) (0.28) (0.88) (2.27*) (
1.35) (
1.51) (
1.15) (
0.88)
Log (fertility rate)
1.26
1.88
1.08
2.19
0.29
0.34
0.18
0.22
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(
1.27) (
1.93**) (
1.08) (
2.09*) (
2.33*) (
2.59 ) (
2.25*) (
2.59 )

Investment (in percentage of GDP) 0.16 0.17 0.18 0.20 0.01 0.01 0.01 0.01
(5.36 ) (5.88 ) (5.79 ) (6.36 ) (2.45*) (2.75 ) (3.73 ) (4.35 )
Government consumption
0.11
0.10
0.10
0.11
0.01
0.01
0.001
0.01
(in percentage of GDP) (
2.24*) (
2.18*) (
2.08*) (
2.44*) (
1.08) (
1.02) (
1.21) (
1.54)
Rule-of-law index 0.20 0.20 0.24 0.18 0.02 0.02 0.02 0.01
(2.02*) (2.14*) (2.35*) (1.82**) (2.34*) (2.27*) (2.30*) (2.54*)
Inflation rate
0.001
0.001
0.001
0.001
0.0001
0.0001
0.0001
0.0001
(
3.75 ) (
3.71 ) (
3.81 ) (
3.66 ) (
2.42*) (
2.32*) (
3.62 ) (
3.99 )
Growth rate of terms of trade 4.23 2.69 4.41 3.54 0.21 0.12 0.14 0.08
(1.83**) (1.19) (1.88**) (1.58) (1.33) (0.71) (1.07) (0.63)
Estimation method OLS OLS OLS OLS GMM GMM GMM GMM
Number of countries 106 106 105 105 102 102 100 100
Number of observations 435 435 463 423 326 326 314 314
R2 (within) 0.43 0.46 0.37 0.46
Hausman test (Prob > Chi2) 0.00 0.00 0.00 0.00
(Prob > F ) 0.00 0.00 0.00 0.01 0.00 0.00 0.00 0.00
Sargan test ( p-level) 0.29 0.35 0.03 0.28
Arellano-Bond test ( p-level) 0.85 0.96 0.22 0.16
Notes: In the OLS regressions, the dependent variable is the average GDP per capita growth rate. When estimated with
GMM, the natural logarithm of per capita GDP at the end of each five-year period is employed.
Column 7b treats the interaction terms as predetermined, while all variables are treated as exogenous in the other columns.
A dummy for each time period is included; the OLS regressions also include a dummy for each country. The Hausman test
tests whether the difference between random and fixed effects estimates is not systematic; the F-test tests whether it is valid
to exclude the time-dummies.
Robust (White) t-statistics are shown in parentheses:

significant at the 1% level, * significant at the 5% level, ** significant at the 10% level.

Columns 5 to 7 report results estimated with the
Arellano-Bond estimator. Confirming the OLS
results, the overall sub-index, the index of actual
flows and the interaction of high income and restric-
tions significantly influence growth. However, the
Sargan test rejects the instruments when the inter-
actions are included. They are therefore treated as
predetermined. Column 7b shows the results. The
coefficient of the high income and restrictions inter-
action term is highly significant. Both the Sargan
test and the Arellano-Bond test of second-order
autocorrelation now clearly accept the specification.
Table 6 reports the results for the political dimen-
sion. This aspect of globalization has never been
studied in the context of growth. However, political
integration might influence growth rates. Economic
globalization leads to the inability of national
governments to control their citizens (Allison, 2000:
83). On the one hand, high political integration
could serve governments as counterweight to
 1102 A. Dreher
Table 6. Per capita GDP growth and political integration European Union or free trade zones like NAFTA
(1970–2000) and MERCOSUR. As columns 1 and 2 show,
1 2 however, political integration is completely irrelevant
for economic growth.
Index of political integration 0.003 0.01
Finally, Table 7 reports results for social integra-
(0.02) (0.65)
Log (per capita GDP),
5.75 1.40 tion. As Boockmann and Dreher (2003) point out,
beginning of period (
6.85 ) (3.88 ) means of information and communication may
Secondary school enrolment 0.03
0.004 prove important since they relay information about
(3.10 ) (
1.40) economic success in other countries. Exposure to
Log (life expectancy) 1.86
0.38
(0.84) (
1.40) such information may provoke discussions which
Log (fertility rate)
1.37
0.28 result in the acceptance of new concepts (Brown et al.
(
1.39) (
2.23*) 2000: 279). Successful technologies are then adopted
Investment (in percentage of GDP) 0.18 0.01 which promotes growth. As Mayer-Schöenberger
(5.93 ) (2.83 )
Government consumption
0.09
0.01 and Hurley (2000: 147) put it, global communication
(in percentage of GDP) (
1.98*) (
1.09) networks promote international trade and economic
Rule-of-law index 0.19 0.02 integration, as they lower cross-border transaction
(2.00**) (2.40*) costs. Marketing information can thus be accessed
Inflation rate
0.001
0.0001
(
3.83 ) (
2.23*) by customers worldwide which implicates a decline
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Growth rate of terms of trade 4.41 0.23 in the importance of geographic proximity. Given a
(1.92**) (1.37) certain level of information about economic policies
Estimation method OLS GMM in other countries, cultural proximity could reduce
Number of countries 106 102 resistance against those ideas. For example, structural
Number of observations 435 326 reforms conducted by many industrial countries in
R2 (within) 0.42 the 1980s spread only slowly to developing nations.
Hausman test (Prob > Chi2) 0.00
(Prob > F ) 0.00 0.01 Only with increased proximity, developing countries
Sargan test ( p-level) 0.33 reformed their economies as well. It could also be,
Arellano-Bond test ( p-level) 0.87 that simply adopting Western technology would not
Notes: In the OLS regressions, the dependent variable is lead to higher growth rates without adopting the
the average GDP per capita growth rate. When estimated social and cultural environment in which it is
with GMM, the natural logarithm of per capita GDP at the embedded (Saich, 2000: 211).
end of each five-year period is employed. Since data on cultural proximity are available for
A dummy for each time period is included; the OLS
only two periods, the table includes only results on
regressions also include a dummy for each country. The
Hausman test tests whether the difference between personal contact and information flows as well as the
random and fixed effects estimates is not systematic; overall sub-index. As can be seen in column 1, social
the F-test tests whether it is valid to exclude the time- integration significantly promotes growth. The index
dummies. of personal contact is only marginally significant.
Robust (White) t-statistics are shown in parentheses:

significant at the 1% level, * significant at the 5% level, Information flows are significant at the 1% level
** significant at the 10% level. (columns 2 and 3, respectively).
When estimated with GMM (and thus in differ-
ences), all three indexes do not seem to influence
growth (columns 4 to 6). The former results may thus
globalized markets. They could co-operate to promote emerge due to reversed causality. The study therefore
more redistribution than would otherwise be possible. tried to estimate all regressions with the globalization
This would probably reduce economic growth. A variables lagged one five-year-period (not reported in
good example is pre-industrial-revolution-Europe. the table). It turns out that only information flows
Low political integration and resulting competition have a significant influence on economic growth.
between governments strongly promoted economic This result is confirmed, when information flows are
and technical innovations (Rosenberg and Birdzell, treated as predetermined in the GMM regression
1986: 137, Jones, 1981: 138). On the other hand, (column 6b).19 Only this specification is accepted
high integration could lead to reforms in political by the Sargan test and the Arellano-Bond test,
or economic processes and thus promote growth. while the overidentifying restrictions are rejected
Examples could be monopoly regulation in the when the index is treated as exogenous.
19
When treated as predetermined, the overall social integration index is also significant at the 1% level.
 Does globalization affect growth? 1103
Table 7. Per capita GDP growth and social integration (1970–2000)

1 2 3 4 5 6a 6b
Index of social integration 0.83 0.03
(3.69 ) (1.19)
Index of personal contact 0.29 0.01
(1.86**) (0.64)
Index of information flows 1.25 0.03 0.12
(3.70 ) (0.75) (3.15 )
Log (per capita GDP),
6.13
6.45
6.31 1.23 1.15 1.16 0.75
beginning of period (
7.64 ) (
7.64 ) (
7.77 ) (3.33 ) (3.16 ) (3.08 ) (4.67 )
Secondary school enrolment 0.02 0.02 0.02
0.002
0.002
0.002
0.001
(2.08*) (1.74**) (2.11*) (
1.20) (
0.93) (
1.07) (
0.90)
Log (life expectancy) 1.35 2.23 1.22
0.27
0.18
0.31
0.28
(0.60) (1.03) (0.55) (
1.66**) (
0.79) (
1.45) (
2.16*)
Log (fertility rate)
2.49
0.88
3.24
0.28
0.23
0.27
0.30
(
2.27*) (
0.89) (
2.74 ) (
2.55*) (
1.86**) (
2.60 ) (
3.50 )
Investment (in percentage of GDP) 0.17 0.16 0.18 0.01 0.01 0.01 0.01
(6.07 ) (5.13 ) (6.15 ) (3.10 ) (2.75 ) (3.24 ) (4.44 )
Government consumption
0.09
0.83
0.10
0.01
0.01
0.01
0.01
(in percentage of GDP) (
1.93**) (
1.70**) (
2.17*) (
1.06) (
0.82) (
1.11) (
1.31)
Rule-of-law index 0.16 0.17 0.15 0.02 0.02 0.02 0.01
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(1.65**) (1.71**) (1.50) (2.18*) (2.37*) (2.15*) (1.73**)

Inflation rate
0.001
0.01
0.001
0.0001
0.0001
0.0001
0.0001
(
4.10 ) (
2.43*) (
3.81 ) (
2.53*) (
2.18*) (
2.71 ) (
3.85 )
Growth rate of terms of trade 3.60 2.16 3.99 0.24 0.12 0.21 0.13
(1.64) (0.94) (1.78**) (1.36) (0.74) (1.44) (1.09)
Estimation method OLS OLS OLS GMM GMM GMM GMM
Number of countries 106 105 106 102 99 102 102
Number of observations 434 403 435 325 294 326 326
R2 (within) 0.44 0.45 0.44
Hausman test (Prob > Chi2) 0.00 0.00 0.00
(Prob > F ) 0.04 0.02 0.03 0.02 0.01 0.02 0.03
Sargan test ( p-level) 0.23 0.17 0.07 0.12
Arellano-Bond test ( p-level) 0.67 0.57 0.53 0.13
Notes: In the OLS regressions, the dependent variable is the average GDP per capita growth rate. When estimated with
GMM, the natural logarithm of per capita GDP at the end of each five-year period is employed.
Column 6b treats information flows as predetermined, while all variables are treated as exogenous in the other columns.
A dummy for each time period is included; the OLS regressions also include a dummy for each country. The Hausman test
tests whether the difference between random and fixed effects estimates is not systematic; the F-test tests whether it is valid to
exclude the time-dummies.
Robust (White) t-statistics are shown in parentheses:

significant at the 1% level, * significant at the 5% level, ** significant at the 10% level.

Summing up, in addition to the overall index of
globalization, several dimensions have a significant
(positive) influence on growth: actual economic
flows, capital and trade restrictions in developed
countries, and flows of information. The following
paragraph examines the robustness of these findings.
IV. Robustness Analysis
The study tests for the robustness of the overall index,
actual economic flows, capital and trade restrictions
in developed countries, and flows of information.
First, it checks for the influence of outliers using
an algorithm that is robust to them. The robust
regression technique weighs observations in an
iterative process. Starting with OLS, estimates are
obtained through weighted least squares where
observations with relatively large residuals get
smaller weight. This results in estimates not being
overly influenced by any specific observation.
Second, all regressions are replicated (estimated
with OLS and GMM) omitting – one at a time – the
following sub-groups: East Asian countries,
Latin American countries, Sub-Saharan-African
countries, OECD countries and, finally, India and
China. Third, further variables which could influence
the relationship between the indexes and growth
are included: black market premium, overall
budget balance, political instability, the theil index
 1104 A. Dreher
Table 8. Robustness analysis

Restrictions
Actual Log (per capita GDP),
Overall index economic flows (high income countries) Information flows

OLS GMM OLS GMM OLS GMM OLS GMM

Robust regression 5 5 5 insig.
Without East Asian countries 1 10 1 10 1 1 1 10
Without Latin American countries 5 insig. 1 5 1 1 1 10
Without Sub-Saharan Africa 10 1 1 5 5 5 1 5
Without OECD countries 5 1 1 10 – – insig. insig.
Without China 1 5 1 5 1 1 1 10
and India
Black market premium 1 10 1 1 1 1 1 insig.
Overall budget balance 5 insig. 1 5 1 5 1 insig.
Political instability 5 insig. 1 5 1 5 1 insig.
Theil index 5 10 1 10 1 1 1 insig.
Banking quality 5c 5 1 1 insig. insig. insig. insig.
Institutional variables 1c insig. 1 5 1 1 1 5
a
Re-weighted indexes 1 10 1 10 1 5 1 5
Re-weighted indexesb 1 10 1 5 1 1 insig. insig.
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Notes: In the OLS regressions, the dependent variable is the average GDP per capita growth rate. When estimated with
GMM, the natural logarithm of per capita GDP at the end of each five-year period is employed.
Numbers indicate the significance level of the respective index. All regressions include the covariates of Table 4, column 1.
a
No category has been omitted, even if no data for the index has been available in a certain period. Instead, data from the
next period available has been used.
b
Weights for each period have been determined by Principal Components Analysis (instead of using the same weights
for all periods).
c
This corresponds to the results of Table 4.

of inequality20 as well as the variables of banking
quality and institutional variables introduced above.
As an obvious shortcoming of the procedure used
to derive the globalization indexes, changes in the
index over time might to some extent reflect missing
data instead of real changes in globalization. To
examine this shortcoming, fourth, an alternative
procedure has been used as well. In those years
where no data for some categories exist, the latest
data available have been employed for constructing
the indexes. Changes in the index over time therefore
only reflect changes in the underlying data.21
Fifth, instead of weighing the components of the
index equally in all periods, principal components
analysis is applied to each individual sub-period.
As it turns out, the resulting rankings are almost
identical to those reported in Table 2. Correlation
between the indexes is 0.996 for the 1991–1995
period, 0.983 (1986–1990), 0.986 (1981–1985), 0.988
(1976–1980), and 0.939 (1971–1975). Nevertheless
the robustness of the results is tested using the
re-weighted index.
To measure political instability, an index employing
the following variables is constructed: assassinations,
strikes, guerrilla warfare, crisis, riots and revolutions.
Since those variables are highly collinear, they cannot
all be included separately in one regression. Therefore
an overall indicator is constructed, again using
principal components analysis.22
Table 8 shows the results of the stability analysis.
It turns out that the overall index of globalization
is not completely robust to the inclusion of further
variables in the GMM regressions. In most cases,
however, the coefficients do not become insignificant
because of the inclusion of the variables but to
the drastically reduced number of observations.
For example, including the variables of banking
quality reduces the number of observations to 183

20
The Gini coefficient was also tried but this leaves one with too few observations for a meaningful regression.
21
However, note that this way of filling the gaps affects the time specific dummies also.
22
The weights obtained are 0.08 (assassination), 0.1 (strikes), 0.25 (guerrilla warfare), 0.15 (crisis), 0.16 (riots) and 0.27
(revolutions).
 Does globalization affect growth?
(when estimated with GMM). The coefficients remain
insignificant when the sample is restricted to those
countries where the additional variables are avai-
lable even if the variables are not included in the
regression. Using different weights for the index does,
however, not affect the results. The table also shows
that the result is not driven by outlying observations.
Actual economic flows are highly robust to the
inclusion of further variables, the exclusion of
countries, the estimation method, and the construc-
tion of the index. Its coefficient is significant at least
at the 10% level in all regressions. The influence
of restrictions in developed countries is similarly
robust. Only the reduction in the number of
observations when the banking quality variables
are included destroys its significant influence on
growth. If the banking quality variables are included,
only 194 observations remain. OECD countries
are not excluded since this would leave one with an
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insufficient number of high income countries.
As can be seen in the table, information flows
are less robustly related to economic growth. They
lose their significance, when any of the additional
variables except those accounting for institutional
quality are included. Excluding OECD countries and
employing individual weights for each period also
destroys the coefficients’ significance.
V. Conclusion
It has been shown that, contrary to the beliefs of
its critics, globalization indeed promotes growth.
The overall index of globalization developed in this
study is highly significant in most specifications and
has been shown to be quite robust to the inclusion
of potentially relevant covariates in the regression as
well as different estimation methods. These effects
are economically relevant. As an example, it has been
shown that Latvia could increase its economic growth
rate from 5.94 to 7.1 if it would be as integrated
with the rest of the world as Spain is. This example
shows the limitations of the globalization process in
reducing poverty as well. For Latvia to become as
globalized as Spain would require enormous efforts.
Such effort is nearly impossible to achieve in the short
run but will take many years. As another example,
the country with one of the biggest (positive) changes
in globalization from 1975 to 2000 has been China.
Its index increased by 2.14 points. According to the
regression results from Table 4 this would mean
that China’s growth rate in 2000 is 2.33 percentage
points higher as in 1975 due to increased integration
with the rest of the world.
1105
In summary, globalization is good for growth.
On average, countries that globalized more, experi-
enced higher growth rates. This is especially true
for actual economic integration and – in developed
countries – the absence of restrictions on trade and
capital. There is also evidence, that cross-border
information flows promote growth. The accusation
that poverty prevails because of globalization is
therefore not valid. To the contrary, those countries
with the lowest growth rates are those who did
not globalize. Countries like Rwanda or Zimbabwe,
e.g., insulated themselves from the world economy.
They have poor institutions which repress growth
and promote poverty. Nevertheless, all else equal
it will not be enough for poor countries simply to
globalize their economies to spur growth rates
and reduce poverty.
Acknowledgements
The author thanks Bernhard Boockmann, Christos
Kotsogiannis, Quan Li, Verena Liessem, Fulvio
Mulatero, Torsten Saadma, Lars-H. R. Siemers,
seminar participants at the ENTER Jamboree
Meeting 2003, the Passau Workshop ‘Internationale
Wirtschaftsbeziehungen’ 2003, the 6th Annual
Conference on Global Economic Analysis (2003),
the European Economic Association (2003), the
Verein fuer Socialpolitik (2003), the Malmö work-
shop on Globalization and Health (2005), the
universities of Goettingen, de las Americas and
Exeter, and a referee of this journal for valuable
comments.
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Appendix A: Definitions
Trade (in percentage of GDP): Sum of exports and
imports of goods and services measured as a share
of gross domestic product.
Foreign Direct Investment (in percentage of GDP):
Sum of the absolute values of inflows and outflows
of foreign direct investment recorded in the balance
of payments.
Portfolio investment (in percentage of GDP): Sum
of absolute values of portfolio investment assets and
portfolio investment liabilities.
Income (in percentage of GDP): Income payments
refer to employee compensation paid to nonresident
workers and investment income.
Hidden Import Barriers: barriers other than
published tariffs and quotas.
1107
Mean Tariff Rate: The formula used to calcu-
late the 0-to-10 rating for each country
was: (Vmax
Vi)/(Vmax
Vmin) multiplied by 10. vi
represents the country‘s mean tariff rate. The values
for Vmin and Vmax were set at 0% and 50%,
respectively. This formula will allocate a rating of
10 to countries that do not impose tariffs. As the
mean tariff rate increases, countries are assigned
lower ratings. The rating will decline toward zero as
the mean tariff rate approaches 50%.
Taxes on International Trade (in percentage of
current revenue): Include import duties, export
duties, profits of export or import monopolies,
exchange profits and exchange taxes.
Capital Account Restrictions: The index is based
on the IMF’s Annual Report on Exchange
Arrangements and Exchange Restrictions and
includes 13 different types of capital controls.
It is constructed by subtracting the number of
restriction from 13 and multiplying the result by 10.
Embassies in Country: Absolute number.
Membership in International Organizations:
Absolute number.
für
Participation in UN Security Council missions:
Absolute number of missions a country participated.
Outgoing telephone traffic: Measured in minutes
per 1000 population.
Transfers (in percentage of GDP): Measures inflows
and outflows of goods, services, income, or financial
items without a quid pro quo.
International tourism (as a share of population):
Sum of arrivals and departures.
Telephone average costs of call to USA: Cost of
a three-minute peak rate call from the country to
the USA.
Foreign Population (in percentage of total popula-
tion): Foreign (or foreign-born) population is the
number of foreign or foreign-born residents in a
country.
Telephone mainlines (per 1000 people): Telephone
mainlines are telephone lines connecting a customer’s
equipment to the public switched telephone network.
Internet hosts (per capita).
Internet users (as a share of population): Internet
users are people with access to the worldwide
network.
Cable television (per 1000 people): Cable television
subscribers are households that subscribe to a
 1108
multichannel television service delivered by a fixed
line connection.
Daily newspapers (per 1000 people): Daily newspapers
refer to those published at least four times a week.
Radios (per 1000 people): Radios refer to radio
receivers in use for broadcasts to the general public.
Number of McDonald’s restaurants (per capita).
GDP per capita growth: Annual percentage growth
rate of GDP per capita based on constant local
currency.
Log (per capita GDP): GDP per capita is gross
domestic product divided by midyear population.
Data are for the end of each five–year period.
Secondary school enrolment: Gross enrolment
ratio is the ratio of total enrolment, regardless of
age, to the population of the age group that officially
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corresponds to the level of education shown.
Secondary education completes the provision of
basic education that began at the primary level.
Log (life expectancy): Life expectancy at birth
indicates the number of years a newborn infant
would live if prevailing patterns of mortality at the
time of its birth were to stay the same throughout
its life.
Log (fertility rate): Represents the number of children
that would be born to a woman if she were to live to the
end of her childbearing years and bear children in
accordance with prevailing age-specific fertility rates.
Investment (in percent of GDP): Gross domestic
investment.
Government consumption (in percentage of GDP):
All government current expenditures for purchases
A. Dreher
of goods and services (including compensation of
employees).
Rule-of-Law Index: Measures the quality of the
legal system and property rights.
Inflation rate: Measured by the consumer price index.
The Laspeyres formula is generally used.
Growth rate of terms of trade: Base year is 1995.
Liquid liabilities: Liquid liabilities to GDP equals
currency plus demand and interest-bearing liabilities
of banks and other financial intermediaries divided
by GDP.
Stock Market capitalization: Equals the value of
listed shares divided by GDP.
Political rights: rates political rights with 1 represent-
ing the most free and 7 the least free.
Civil liberties: rates civil liberties with 1 representing
the most free and 7 the least free.
Democracy: 0–10 (0 ¼ low; 10 ¼ high) democracy
score. Measures the general openness of political
institutions.
Black market premium: (Parallel exchange rate/
official exchange rate–1)  100.
Overall budget balance (in percentage of GDP):
Includes grants.
Political instability: Index constructed with principal
components analysis. The weights obtained for the
components are 0.08 (assassination), 0.1 (strikes),
0.25 (guerrilla warfare), 0.15 (crisis), 0.16 (riots) and
0.27 (revolutions).
Theil index: The Theil inequality index is a weighted
geometric average of income relatives.
 Does globalization affect growth? 1109
Appendix B: Descriptive Statistics and Data Sources
Variable Data source Mean Std. dev.
Trade index World Bank (2002a) overall 1.91 1.44
between 1.36
within 0.48
Foreign direct World Bank (2002a) overall 1.24 1.54
investment index between 1.31
within 0.93
Portfolio investment IMF (2002) overall 1.48 1.82
index between 1.32
within 1.17
Income index World Bank (2002a) overall 0.88 1.43
between 1.22
within 0.98
Hidden import Gwartney and overall 6.47 1.82
barriers index Lawson (2002) between 1.82
within 0.44
Mean tariff rate index Gwartney and overall 6.32 2.66
Lawson (2002) between 2.15
within 1.49
Taxes on international World Bank (2002a) overall 7.42 2.39
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trade index between 2.29

within 0.91
Capital account Gwartney and overall 3.10 3.32
restrictions index Lawson (2002) between 2.70
within 1.92
Embassies in country Europa World overall 3.51 2.47
index yearbook between 2.18
(various years) within 1.18
Membership in Union of International overall 4.41 1.92
international Associations between 1.63
organizations index (various years) within 1.01
Participation in UN Department of overall 1.49 2.33
Security Council Peacekeeping between 2.07
missions index Operations, UN within 1.09
Outgoing telephone World Bank (2002a) overall 0.68 1.38
traffic index between 1.22
within 0.40
Transfers index World Bank (2002a) overall 1.95 2.09
between 1.89
within 1.11
International tourism World Bank (2002a) overall 1.62 2.11
index between 1.95
within 0.58
Telephone average World Bank (2002a) overall 7.92 1.84
costs of call to USA between 1.84
index within 0.00
Internet hosts index International overall 0.96 1.77
Telecommunications between 1.75
Union within 0.31
Internet users index World Bank (2002a) overall 0.32 1.14
between 0.60
within 0.98
Cable television World Bank (2002a) overall 1.37 2.40
index between 1.93
within 0.84
Daily newspapers World Bank (2002a) overall 1.68 2.06
index between 1.98
within 0.41
Radios index World Bank (2002a) overall 1.72 1.58
between 1.50
within 0.50

(continued)
 1110 A. Dreher
Appendix B: Continued
Variable Data source Mean Std. dev.
McDonald’s index McDonald’s overall 1.09 1.89
Corporation between 1.85
within 0.41
GDP per capita World Bank (2002a) overall 1.52 3.30
growth rate between 1.96
within 2.67
Log (per capita GDP) World Bank (2002a) overall 7.79 1.58
between 1.56
within 0.21
Secondary school World Bank (2002a) overall 56.55 32.93
enrolment between 31.09
within 11.20
Log (life World Bank (2002a) overall 4.14 0.19
expectancy) between 0.18
within 0.05
Log (fertility rate) World Bank (2002a) overall 1.22 0.55
between 0.52
within 0.18
Investment (in Global Development overall 22.48 7.21
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percentage of GDP) Network Growth between 5.69

Database within 4.38
Government World Bank (2002a) overall 15.46 5.92
consumption (in between 5.26
percentage of GDP) within 2.81
Rule-of-law index Gwartney and overall 5.47 1.96
Lawson (2002) between 1.60
within 1.06
Inflation rate World Bank (2002a) overall 54.86 368.39
between 180.43
within 325.48
Growth rate of World Bank (2002a) overall 0.0034 0.0589
terms of trade between 0.0277
within 0.0539
Liquid liabilities Beck et al. (1999) overall 0.46 0.31
between 0.31
within 0.13
Stock market Beck et al. (1999) overall 0.33 0.45
capitalization between 0.36
within 0.24
Political rights Gastil (2000) overall 3.75 2.18
between 1.90
within 1.06
Civil liberties Gastil (2000) overall 3.80 1.88
between 1.69
within 0.83
Democracy Marshall and Jaggers overall 4.68 4.23
(2000) between 3.77
within 1.93
Black market Global Development overall 143.68 2109.66
premium Network Growth between 4615.41
Database within 411.32
Overall budget World Bank (2002a) overall
3.33 5.25
balance between 4.11
within 3.55
Political instability Global Development overall 0.23 0.37
Network Growth between 0.27
Database within 0.25
Theil index University of Texas overall 0.05 0.05
Inequality Project between 0.05
within 0.03